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PELLHAM, Ontario – CannTrust Holdings, a Canadian cannabis company listed on the New York and Toronto stock exchanges, is under investigation for potential financial fraud and regulatory crimes related to unlicensed growing and capital raising. Unlicensed cultivation is a criminal offense under Canadian law.

On August 1, the case was handed to the Joint Serious Offences Team, an enforcement partnership between the Ontario Securities Commission, the Royal Canadian Mounted Police Financial Crimes Unit, and the Ontario Provincial Police Anti-Rackets Branch. Calling the effort a “quasi-criminal” investigation, the JSOT confirmed the inquiry but declined to provide details.

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The news dug a deeper hole for CannTrust’s market capitalization, which has been on a downhill slide from a TSX high of C$1.9 billion in November 2018 to a Monday close of C$423.7 million—a loss of nearly C$1.5 billion in nine months.

The CannTrust board of directors placed the company up for sale last week. Canadian company Aphria Inc. has expressed interest in acquiring the assets.

CannTrust came under fire on July 3, when Health Canada, which regulates cannabis in the country, issued a non-compliance order and impounded 5,200 kg of dried cannabis the agency said was grown in unlicensed facilities. CannTrust put a voluntary hold on an additional 7,500 kg of inventory destined for domestic and international sale. The company estimated the market value of the assets at more than C$51 million, although analysts placed the value at closer to C$70 million based on first-quarter averages. CannTrust also disclosed employees provided inaccurate information to regulators.

The next day, Stenocare A/S, a Danish medical cannabis company, released a statement saying one of the shipments it received from CannTrust included material from the unlicensed grows. Stenocare alerted Danish authorities and placed the material in quarantine. Exporting unlicensed cannabis is a crime under the Canadian Cannabis Act.

On July 12, CannTrust halted all sales pending the outcome of additional regulatory inspections and its own internal investigation. On July 25, the company fired Chief Executive Officer Peter Aceto “for cause” and forced the resignation of co-founder and Chairman Eric Paul after the Globe and Mail obtained email indicating both men were aware of the illegal operations seven months before Health Canada uncovered regulatory irregularities.

“We dodged some bullets,” CannTrust Director of Quality and Compliance Graham Lee wrote in an email addressed to Aceto and others on November 8. “[Health Canada] did not ask about RG8E/W, which are unlicensed rooms currently full of plants.” The email also mentioned “a large number of lost bottles [of product] we have not reported.

“Although serious, on their own, each of these can be talked through with [Health Canada],” Lee continued. “The concern is that together they will paint a picture with the regulator of a company not in control.”

Depending on Health Canada’s findings, CannTrust may face suspension or revocation of its licenses, plus a $1 million fine. If the JSOT’s investigation results in criminal charges, individuals could face as many as fourteen years in prison and fines up to $5 million.

The company also is the target of a class-action lawsuit alleging CannTrust gave investors “materially false and misleading” information about the company’s operations and prospects. In May, Bloomberg reported Bank of America Merrill Lynch, Citigroup, Credit Suisse Securities, and RBC Capital Markets led an offering that raised approximately $170 million.

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